Focus on Due Diligence

Every asset acquisition or sale has its risks and opportunities, and every infrastructure transaction will be affected by regulations determined by sector and jurisdiction.

Oxera is a specialist in due diligence. We understand the economic drivers that affect the value of any asset. We provide investors, companies and lenders with a clear and objective assessment of these drivers, and how to mitigate any uncertainties, before and after acquisitions.

‘‘We provide our clients with confidence.’’

In this Q&A, Oxera economic experts discuss the success stories and key issues our clients face in due diligence

Oxera’s ability goes beyond desk-based research to apply in-depth thinking and provide a range of likely outcomes based on our extensive regulatory experience. The key skill sets we employ are:

We support all phases of the due diligence process, from the indicative bid through to the binding bid and beyond the sale to post-closure support.

Here's how:

Identify opportunities and market screening
Which sector? What fits with client’s existing portfolio? Any changes in regulation/technology/environment/macroeconomy/demographics that may affect valuations?

Analyse identified targets and due diligence

What are the value drivers? Risk factors and competitive landscape regulatory risks and opportunities—effect on valuation

Post-acquisition & management

Best way to engage regulators and public bodies? Best way to respond to demand and supply shocks? How do policy/regulatory and CAPEX cycles affect exit strategy/timing and valuations?

Southern Water

Assisting a successful sale

Client:

FutureFund

Asset:

Stake in Southern Water

Result:

Stake sold successfully to new owner

Client:FutureFund

Asset:Stake in Southern Water

Result:Stake sold successfully to new owner

Selling a large infrastructure asset like a water utility is no easy task. There are several challenges to overcome, including:

communicating the nuances of a national and sector-specific regulatory regime to international investors who own infrastructure assets around the globe;

presenting the regulatory value drivers in a non-technical way;

accounting for possible changes to regulation, to identify potential future risks and growth opportunities to investors;

and the key challenge—doing all of these things in plain language in an easily digestible format!

That is why when FutureFund decided to sell its equity stake in Southern Water, we were engaged to provide a vendor regulatory due diligence report.

We provided a comprehensive overview of the regulatory regime in the water sector in England and Wales, focusing on the above factors. In particular, we took account of all the changes afoot in the sector, including retail competition, the creation of upstream markets, and the regulator’s proposed methodology for the next price review. We were well placed to advise on each of these areas, given our expertise in the water sector and our previous experience with due diligence assignments.

Our report was used to inform the information memorandum and was sent to all prospective bidders. Following this process, the stake was sold to Hermes and UBS.

Porterbrook

The right bid at the right price

Client:

Multinational consortium of infrastructure funds

Asset:

Porterbrook Rolling Stock

Result:

Client won the bid

Client:Multinational consortium of infrastructure funds

Asset:Porterbrook Rolling Stock

Result:Client won the bid

As with any due diligence project, our main purpose is to help the investor make an acquisition decision more easily. Working with a multinational consortium bidding to acquire Porterbrook, a UK rolling stock company, required some flexibility in our approach. First, rolling stock is not yet a regulated asset. A big part of our due diligence was to identify signs of this sector becoming regulated. And if it did become regulated, understanding what the impact would be on the profitability of the asset. And, second, our client had no frame of reference for this acquisition.

With our due diligence experience in this jurisdiction and other sectors within the European Commission, we could create comparisons for this asset to other infrastructure assets such as electricity and water, areas that our investor team were more comfortable with. So we translated and reframed our findings to explain the results in a context the client understood.

We also provided our client with a detailed forecast of demand and supply across the industry, taking into account the drivers of long-run growth in passenger demand at national and regional levels. Combining this with technical data on rolling-stock capacity and network infrastructure constraints, we forecast demand for individual fleets and vehicle types. This gave our client a competitive edge in understanding the risks and growth opportunities of the assets it was bidding for.

Through our close links within our industry network, we spotted a proposed regulation from the European Commission that was not on the radar of the investor or banking community. The proposed regulation would open up the provision of services to competition, allowing for the regular movement of assets across different operating companies. This changed the potential value of, and operational impact on the acquisition. This knowledge gave our client confidence in having all the right information to make the right bid at the right price for an asset they now have within their portfolio.

Oxera: respected adviser in infrastructure transactions
We work with many different clients from all over the world, across a range of sectors.

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